You sell one IBM July 90 call contract for a premium of $4 and two puts for a premium of $3 each.You hold the position until the expiration date when IBM stock sells for $95 per share.You will realize a ______ on this strip.

Question

Quizplus · Accepted Answer

Selling one IBM July 90 call at a premium of $4 means that you have an obligation to sell 100 shares of IBM at $90 if the buyer of the call exercises the option. In this case, since the expiration price of IBM is $95, the call option will not be exercised and the seller gets to keep the $4 premium as profit.

Selling two IBM July 90 puts at a premium of $3 each means that you have an obligation to buy 200 shares of IBM at $90 if the buyers of the puts exercise their options. In this case, since the expiration price of IBM is $95, the put options will not be exercised and the seller gets to keep the $6 premium as profit.

Therefore, the total profit from selling the call and puts is $4 + $6 = $10 per share or $1,000 (since each contract is for 100 shares). The net profit after subtracting any initial transaction costs will be less than $1,000, but the closest option is $500 profit.

You Sell One IBM July 90 Call Contract for a Premium